That case holds that if an insurer agrees to defend its
policyholder in a claim and then wins a separate declaratory
judgment action determining that it has no duty to defend, the insurer is not
entitled to recoup the defense costs it has already paid out. That is an
important holding on a question that has been unsettled in Massachusetts.

As I discussed in the Lawyers Weekly article, the case also holds, in my opinion contradictorily, that the insurer does not
have to pay defense costs that have been incurred but not paid by the time of
the ruling that there is no duty to defend. There is no indication in the
decision that the insurer had given notice to the policyholder before the bills
were incurred that it did not intend to pay them. The distinction between
bills that had been submitted and paid by the insurer and bills that had been
submitted and not yet paid by the insurer seems like a random one.

In Vibram, the policyholder had exercised its right to control
its own defense by hiring counsel of its choice, who would be paid by the
insurer. It was entitled to do so because the insurer was defending under
a reservation of its right to later deny coverage.

The court held that the fact that the policyholder was
controlling its own defense meant that it was not harmed by the retroactive
decision of the insurer not to pay bills that had already been incurred.

The policyholder was Vibram USA, a large
corporation with significant resources. (I am a big fan of Vibram's barefoot sneakers.) But elsewhere in the decision the
court appropriately pointed out that the resources of the policyholder should
not be a factor in determining the duty of the insurer, because similar
policies are issued to individuals and small businesses and the insurer has the
same duty to all policyholders. Yet the court did not take into account
that an individual or a small business might make a different decision about
what kind of defense costs to incur if it understands an insurer will pay those
costs than if it has been told by the insurer that it will not pay those
costs.

The court explained its rationale in part by holding that “there
is nothing inherent in an insurer’s initial decision to provide a defense that
precludes it from changing its mind, even while a declaratory judgment action
is still pending.” That is certainly a correct statement of law. But, as
the court pointed out earlier in the decision, “[i]n the first instance, it is
for the insurer to determine whether any of the allegations of the complaint,
if proved, could support a claim covered by the policy. If it declines to
provide a defense, it faces potential liabilities that will likely exceed the
cost of defense.” Those liabilities are ch. 93A damages that can be awarded for breach of a duty to defend, and fee
shifting in a declaratory judgment action over the duty to defend if the
policyholder prevails.

The court cited Herbert A. Sullivan v. Utica Mut. Ins. Co.,439 Mass. 387, 395 (2003) for the proposition that an insured can change its
mind about whether it has a duty to defend. But in Herbert A. Sullivan the
insurer did not change its mind – the circumstances changed. The initial
complaint in that case alleged negligence, a claim that was covered under the
policy. The amended complaint eliminated the negligence claim, and none
of the remaining allegations involved covered losses.

The coverage question at issue in Vibram was whether a policy
provision covering Advertising Injury included coverage for a claim based on
the unauthorized use by the policyholder of a famous person’s name to sell the
policyholder’s product. The court does not indicate that any circumstances
changed that would affect that analysis. While an insurer is entitled to
revisit its own legal analysis, I did not see in the decision any rationale for
allowing it to do so retroactively.

As I told Lawyers Weekly, the court’s holding that an insurer can retroactively refuse to
pay defense costs that have already been incurred allows an insurer to have its
cake and eat it too. It can agree to defend under a reservation of
rights, thereby avoiding potential ch. 93A damages for breaching a duty to
defend, while also not paying the defense costs it agreed to pay, perhaps
ever.

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About Me

I have been an attorney in Massachusetts since 1994. I practice in general litigation and focus on insurance coverage issues. I am available to assist claimants, insureds, and insurers who have a dispute over motor vehicle, homeowners, general liability, and other insurance policies. I also draft briefs and provide other litigation services to fellow attorneys on a subcontract basis.
You can learn more about me, and find links to my published opinions, at my website, www.kallenlawyer.com.

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